When you sell your business, you have a basic choice to make: Do you want to sell it externally, or do you want to sell it internally to your employees or family members?
There are many things to consider when making this decision, such as whether or not you have a management team with an interest in buying your business, or how important it is that you keep your business operating in its current location, etc.
Arguably the most important consideration is price. How important are your after-tax proceeds of the sale relative to other considerations? If price is your most important priority, you’re generally going to get a better deal selling your business externally to a company with a strategic reason to buy your business.
Credit: Barry Wood
Barry Wood: A Case Of Two Different Exits
Barry Wood, a serial entrepreneur, provides a unique insight into the differences between an external and an internal sale, because he has participated in both in the same industry.
Wood took over M&I Door Systems in 1995. M&I, based in Barrie, Ontario, made large commercial grade doors, often for industrial applications like airports or oil refineries.
In 1998 an American competitor approached Wood about buying M&I. The American company was tired of competing with Wood on jobs and liked the product line M&I had created. Wood asked the company to make him an offer and, to his pleasant surprise, his American competitor offered the equivalent of almost nine times EBITDA – almost twice the going rate of five times EBITDA that Wood had seen his industry peers trade for.
Wood accepted the offer, honoured his five year non-compete and then started a new door business called TNR Doors in 2003. Like M&I, TNR became an industry leader in industrial doors. By 2013, Wood was ready to get out. This time, he decided he wanted to give his colleagues the chance to buy him out in the form of an internal sale.
Wood ended up selling his shares to his employees at an industry standard multiple of five times EBITDA, or almost half of what he got when selling a similar company externally. In the first sale, the American competitor had a strategic reason to buy M&I and could immediately increase the bottom line of both Wood’s company and their own. They were therefore willing to pay more.
When selling internally, employees usually have to borrow the money to buy into your business. They rarely have any strategic assets to leverage, and in order for them to see a return on their investment in the future, they need to buy low and hope to sell high.
Could Wood have gotten more for his shares in TNR if he had chosen to sell externally? Probably, but for Wood, who had already had a lucrative exit, maximizing the value of TNR was somewhat secondary to considerations like ensuring his employees still had a job after the sale.
When it comes to deciding to sell externally or internally, there is no right or wrong answer. It comes down to your personal priorities.
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For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at Eric@EdisonAvenue.com or 239.738.6227. Also, visit our Edison Avenue website at www.EdisonAvenue.com or my personal website at www.BuySellFLbiz.com.
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